Indo-American Chamber of Commerce (IACC)


In Articles & White Papers on October 12, 2012 at 7:13 am

The Computer Software Industry has become a significant contributor to India’s economic development.  It continues to march forward.  Last year i.e. FY 2011-12, the revenues from Hardware and Software relating to IT for the first time exceeded $100 billion and constituted about 7½% of India’s GDP.  Computer software exports are now around $70 billion and constitute the largest exports from any sector of this country.

The IT sector offers direct employment to about 2.8 million professionals.  The Per Capita revenues is thus Rs 1.8 million per annum and if every citizen of India could generate a similar revenue, India’s GDP would be the largest in the world, exceed $36 trillion, and twice that of USA today;

Software exports has been a success story.  Export revenues increased from around $8 billion in 2001-02 to around $70 billion in 2011-12.  India has garnered about 58% of the Software export market.  This is as unparalleled feat and one that India can be justifiably proud of.

IT companies are highly valued in India.  TCS overtook Reliance Industries Limited in market-cap and has been one of the most valuable companies in India for quite some time. Its market cap exceeds that of Accenture which is twice its size.  In Bengaluru you have an IT signboard on every corner of the street.

The IT journey of India started in 1965.  I take some credit for this.  I had returned to India in mid-1965 on a summer vacation, after having completed my MBA from MIT.  Soon, thereafter I met Asha who had just returned from England.  I was bowled over by her.  I still remember that I spoke a few sentences to her in French (a language I had learnt in High School) and she responded in French.  For me it was love at first sight.  I proposed to her and she accepted.  Unfortunately, the Pundit told us there was no auspicious day for our marriage for the next few months.  Having stood at the top of my graduating class and having won a Ford Foundation Fellowship, which paid for all expenses relating to a Ph.D., I had decided to return to MIT to complete my Doctorate.  Under the above circumstances I had no option but to request for a deferment of a semester which MIT kindly acceded to.  My evenings were occupied by Asha but I was bored to death as I had nothing to do during the day.

I spoke to Mr. H. Ramnath Rao, my neighbor, who was then the Marketing Manager of Tata Fison.  He suggested I meet Professor Rustom Choksi, a Director at Tatas and headed HR at the Group level.  He set up a meeting for me with Mr. Choksi.  Accordingly I went and met Mr. Choksi and asked him whether I could be of any use to the Tatas during the brief period that I was here.  Professor Choksi sent me to meet Mr. P. M. Agerwala, then Managing Director of Tata Electric Companies, an Electrical Engineer from Rourkee.  I narrated my background to Mr. Agerwala. I told him, besides my academics, thanks to my Professor, Ron Howard, having left for Stanford, as a Visiting Professor at short notice; I had taught Statistical Decision Theory while doing my MBA.  I was also asked to take up his consulting assignment at Arthur D. Little.

Mr. Agerwala said “Why don’t you join? Look around you and write-up some papers on what we can do related to computers”.  At that time computers were virtually unknown in India.  I thus became an employee of the Tata Electric Companies.  I reported to Mr. Agerwala and wrote-up 3 papers, which MBA students are good at, viz.

  1. The automation of the Electric Companies’ Load Despatch System.
  2. Computerization of their billing system (by buying computer time at TIFR who had a CDC 3600 at that time).
  3. For starting an enterprise which I called Tata Computer Centre.

I got married on November 19, 1965 and went back to MIT in January 1966, technically on leave without pay, together with my wife.

To my great surprise, in my absence, based on my 3 papers, Mr. Agerwala, and I assume some other Directors, accepted all 3 of my recommendations.  They ordered a Westinghouse Computer to automate the Load Despatch of the Tata Electric Companies.  They also computerized their electricity billing and decided to set-up the Tata Computer Centre.  Mr. Agerwala used to visit the US very frequently and continued to meet me and urge me to return to India and start the Tata Computer Centre for them.  I was very happy in the US and wanted to stay there for a few years.  However, he persisted and finally offered that I could head this enterprise.  Being a unique opportunity, I could not decline this offer.  At the time I had 2 Indian colleagues at MIT, Nitin Patel and Ashok Malhotra.  I spoke to them about returning to India and joining this enterprise.  They too were excited by this opportunity.  Accordingly the 3 of us returned to India and started what was then called Tata Computer Centrein 1967, as a part of Tata Services Limited.  A year thereafter in 1968, this enterprise was taken over by Tata Sons and renamed as Tata Consultancy Services.

Tata Computer Centre stared by leasing 2 IBM 1401 computers from IBM which were installed at Nirmal Building, the first high rise building at Nariman Point.  We recruited a large number of qualified and competent professionals.  There were around 20 Ph.Ds at the start itself which gave a tremendous impetus to this enterprise.

Historically, the first two companies that entered the fray of Computers and Software in India were:

  1. Hinditron: Founded by Hemant Sonawala in 1966.  Hemant, who later became President of the Computer Society of India, used to work for DEC in the USA.  He returned to India and sold their equipment in India.
  2. Tata Computer Centre in 1967 (renamed as Tata Consultancy Services in 1968)

Thereafter in rapid succession, companies that entered the field were :

1975: Datamatics Ltd. was founded by me after I left Tata Consultancy Services.

1976: HCL was started by Shiv Nadar and Arjun Malhotra.

1977: Tata Burroughs was started initially to manufacture Dot Matrix Printers, but later diversified into Software exports.

1978: Patni Computers was started by Narendra Patni who had also studied at MIT.  He represented Data General.

1980:  Wipro entered this business based on a Project Report submitted by Ashok Narsimhan to Azim Premji.  Initially they wanted to be a Software Product company and had a product called Insta Plan.

1981: Infosys was started with 7 Partners who had worked for Patni Computers.   This included the 4 professionals who successively became CEOs of Infosys – N. R. Narayana Murthy, Nandan Nilekani, S. Gopalakrishnan and S.D. Shibulal.

The Software Industry faced unforeseen problems and hurdles in its earlier days. One can smile at this today but collectively these hurdles set India back by at least 10 years, if not more.

  1. Thanks to the Foreign Exchange shortage, Indians could not travel abroad without specific RBI approval.  One had to apply to the RBI for each trip (using P Form) and file a detailed return to them on what they did during their travel, on return.
  2. There were no Foreign Exchange Credit Cards.  Rental of cars in the US requires a Credit Card and it was a herculean job to convince the Government as to why they should allow Foreign Exchange Credit Cards.
  3. The Government also imposed a Foreign Travel Tax on the purchase of Foreign Exchange.  Accordingly, though for many assignments, the cost of boarding and lodging in overseas companies was borne by the Client, he simply could not understand why he would have to pay the Government of India tax on a Hotel Bill in the USA.
  4. It was virtually impossible to establish overseas Subsidiaries or Branch Offices, so necessary in the Software business.
  5. There was no Venture Capital.  Therefore, young Entrepreneurs without adequate financial backing were not able to start a company.
  6. Overseas acquisitions were virtually impossible.  As of December 2011, the Indian Software Industry had made as many as 806 acquisitions overseas, of which 4 were made by Datamatics itself.
  7. It was extremely difficult to get a meeting with any Minister or a Secretary.  I still remember it required several requests before Mr. T. N. Seshan, then, Cabinet Secretary met with us.

Admittedly all of the above was a part of India’s control mindset and of course there was genuinely an acute shortage of Foreign Exchange.  In 1991, India could borrow $2.2 billion from the IMF only after 67 tons of gold were physically shipped to them.  India had to borrow $600 million from the Union Bank of England and Union Bank of Switzerland under similar circumstances.

It is only after the liberalization initiative by P. V. Narsimha Rao and Dr. Manmohan Singh in 1991 that this crisis disappeared. Today India has $300 billion in foreign exchange reserves and has promised to give Europe $10 billion to help them out during their present crisis!

The next significant event in the evolution of the Software Industry was the formation of Nasscom in 1988, by Mr. Prem Shivdasani, who then was MD of ICL and had earlier worked for IBM.  Dewang Mehta transformed Nasscom, when he joined it in 1991.  He was young (born in 1962), clever, astute and likeable.  He could connect with the young and the old, alike.  He could connect with the businessman and the bureaucrat.  He also had political ambitions and told me that he would join politics sooner or later. His contribution to putting India on the Software map of the world was absolutely invaluable.  Unfortunately, he died in his hotel room in Australia in 2001.  At Nasscom, he was succeeded by Kiran Karnik and Som Mittal who have done an equally good job, though Dewang Mehta was a class in himself.

The next significant event was the setting-up of India’s first satellite link for Software development by Datamatics in 1989 to Bell Labs.  This enabled log on by a computer in India to a computer in the US.  Earlier most Software Professionals had to physically travel to the US for Software development.  Satellite Links considerably reduced such travel and the need for work permits.

Interestingly enough I was hauled up by the Department of Electronics and given a tongue lashing as to how Datamatics had been able to set-up such a Satellite Link without their permission. Their objection was that secrets from India would be transferred to Bell Labs through the Link. I remember that I told the DOE that there were no secrets that India could give to Bell Labs.  In fact, they should be asking me how to get secrets from Bell Labs to India !  Further, I told them that we had applied to VSNL and they had set up this Link.  Hence any action should be against VSNL, which was a Government of India enterprise, for setting-up the Link. Fortunately, thank God, no action was taken.  Today there are thousands of such Links from India.

In those days the cost of making a telephone call to the US was Rs 60 per minute.  Links were similarly expensive and resulted in an unbearable cost on Software exports.  As Chairman of the ESC (Electronics and Computer Software Export Promotion Council) (WIC) I remember having made a Presentation to about 10 Government Secretaries on why they should reduce telecom cost by 25%.  I still remember the Secretary of Telecom saying that ESC did not understand the cost of Telecom, and if they reduced their price VSNL would make a loss.  Today a telephone call to the US costs only Rs 2 per minute and if you use Skype it is free of cost.


First we must admit the fact that the initial motivator was wage arbitrage between the West and India.  Our knowledge of English really helped.  Even today our primary market is the US and UK, and we face problems in Germany, France and Japan.  The freely available satellite links and the decreasing cost of Telecom, including the Internet, have played a stellar role.

The big boost came in the 1990s thanks to the Y2K problem.  The world had become paranoid about Y2K and it is estimated that over $300 billion was spent in addressing this problem.

There was no way that the West could address this problem on their own, due to shortage of technical manpower.   Also, thanks to this problem, the US had no choice but to increase the number of H1 Visas which enabled Indian Software Engineers to work in the US.  The H1 Visa quota of the USA was increased to 115,000 between 1999-2000 and to 195,000 between 2001-2003. Today it is 65,000.

The Government of India was wise enough to allow a tax holiday for both Software and BPO exports for about 10 years.  This enabled Software companies to plough back their profits and thereby increase their international presence in exports.

The Software Technology Park Scheme was also very helpful.  Software companies are naturally reluctant to set-up offices in rural India, as Software Professionals prefer living in cities and Software Technology Parks enabled Software companies to declare even one building in an urban city as a SEZ.  The availability of Venture Capital, which created several companies such as Mindtree, gave a boost particularly to the young professionals.

Fortunately there were no Government controls.  The Software Industry did not require any favours or approvals.  Government could not physically control Software exports.  Several Customs Collectors had come to my office trying to understand how Software is exported and could not believe that we could transmit Software via a Standard telephone with the push of a button. Finally, the Software Industry was in the hands of highly professional, highly educated, Indian entrepreneurs who were hungry.  This was reflected in the rapid growth of this industry.

Another significant event was the exit of IBM, in 1968, thanks to George Fernandes, who insisted on some local ownership of companies operating in India. I remember that at that time I thought this was a big mistake.  However, it turned out to be a blessing in disguise.  Due to the exit of IBM, many Indian companies tied up with smaller computer manufacturers to sell their computers in India.  Tata tied up with Burroughs (later renamed as Unisys). Patni tied up with Data General.  Datamatics with Wang Labs.  Hinditron became aggressive thanks to DEC.  IDM (the successor of IBM) tied up with Prime.

Though the initial objective was to sell their computers in the Indian sub-continent all these companies used their connection with their principals to undertake software exports.  TCS’s first export was to the city of Detroit thanks to Burroughs.  Datamatics first export was to Wang.  This related to the development of Arabic Word Processing.

Fortunately, Nasscom, the Software Industry itself and the Government of India ensured that the essential requirements of this industry were met with. India produces the largest number of Computer Science Graduates in the world.  We have created the largest number of SEI CMMi Level 5 companies in the world (the highest quality certification).  India became visible to the world and received good Press worldwide.  The result was that Indian Software exports grew in 10 years from around $8 billion in 2001-02 to around $70 billion in 2011-12.  There are thousands of Software companies in India today. It forced Western companies to set-up Captive Units in India.  There are over 900 such Captive Units today.  Some of them later sold or spun-off their Captive Units, which further accelerated the Software Industry.  GE spun-off Genpact.  British Airways spun-off WNS.  Citibank sold COSL, i-Flex and e-Serve.

Today all large IT MNCs including IBM, Accenture, HP, Cap Gemini, CSC, etc. have very large establishments in India.  Indian companies export Software worldwide. Datamatics itself has exported software to over 50 companies. Many Software companies have set-up overseas subsidiaries Delivery Centres and Offices.

The future is bright.  Nasscom estimates that India’s Software exports will reach $220 billion by 2020.  TCS is the first Indian Software company whose revenues have exceeded $10 billion. Though TCS contributes only about 1/10 of Tata’s revenues, its profits are about ⅓ of all Tata profits.

India will transition from the sale of Services to the sale of Products / IP.  Here the major challenge will be marketing skills.  Software exports can help India bridge its Foreign Exchange gap. India’s trade gap grew from $109 billion (2009-10) to $119 billion (2010-11) to $185 billion (2011-12).  RBI has estimated that it may grow to $450 (2013-14).  Software exports can help bridge the gap.

India is well poised to address future opportunities such as Cloud Computing, Mobility, Analytics, Embedded Software.  To really succeed, we have to be creative.  An illustration of this is IBM.  Its revenues increased only from $88 billion in 2000 to $107 billion in 2011 i.e. by 21% in 11 years.  On the other hand, Apple was very creative and its revenues increased from $8 billion in 2000 to $108 billion in 2011 i.e. by 1300%.  In fact, its revenues this year are likely to reach $175 billion.  Apple was able to do this because it is creative.

What should India do to ensure that we get to $220 billion in exports?

The famous American saying is “If it ain’t bust don’t fix it.”

The Software Industry is winning. The Indian Government should refrain from tinkering around with Policies that will become detrimental to its growth.  Introduction of MAT in SEZ is counter-productive and negates the promise of the Government that there would be tax benefit in the SEZs for several years.  On this basis a large number of companies had invested in SEZs.  We cannot fool them. MAT is nothing but Income Tax. Today, unfortunately, SEZ presently has become a Land Deal.

Witness how China has become the largest exporter in the world and now exports $1,500 billion.  It has been able to leverage SEZs to their benefit.  The Government should promote and facilitate and not regulate.  This is easier said than done because the natural tendency of any Government is to regulate.  Their power stems from their ability to so NO and not Yes.  Government should encourage businessmen.  They create the wealth of all nations. Laxmi Mittal, who now produces over 100 million tons of steel, should have had his base in India.

We should make overseas Dividends tax free.  Hong Kong and Singapore have done this.  Indian companies have Subsidiaries abroad and to encourage them to remit profits to India such dividends should be made tax free.   They already pay tax on profits in the country they operate in anyway.

There should be public outcry at the high attrition in the Software Industry. One of the primary factors that Voice BPO has shifted from India to Philippines is attrition.  In particular, if we are going to embark on route of Software Products and IP, attrition will be a major problem.  Last but not the least, we should stay hungry.  I often quote Andy Grove who headed Intel and wrote “Only the paranoid survive”.

We have still not arrived.  IBM alone has revenues of $107 billion that exceed the entire sales of Hardware and Software of India.  Microsoft’s sales are $70 billion.  We have a long way to go.

Though we can pat ourselves on our back, there is a long, hard road ahead of us.  We can falter.  If we do, we will only have ourselves to blame.

By: Dr. Lalit S. Kanodia

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